Estimating the Performance Effects of Networks in Emerging Markets

We find econometric evidence that particular inter-firm networks--"business groups"--materially affect the broad patterns of economic performance in 12 of the following 13 emerging markets: Argentina, Brazil, Chile, India, Indonesia, Israel, Mexico, Peru, the Philippines, South Korea, Taiwan, Thailand, and Turkey. Our analysis employs a unique data set compiled largely from local sources. Analysis of the data set shows that the observation-weighted average of the portion of variation explained by group membership across our 13 countries is 10.7%. In most countries, the portion of variation explained by group membership is highly statistically significant, and comparable to the portion of variation explained by industry membership. Moreover, membership in a group boosts the profitability of the average group member in several of the markets we examine. While cross-country comparisons are bedeviled by inconsistencies in group definition across countries, exploratory cross-country analyses provide no support for the widely held view that groups are primarily responses to capital market imperfections, nor for the equally widely held view that groups are primarily devices for rent-seeking behavior